EC Profiting From The “Pre-FOMC Drift”

A very interesting article appeared on the popular financial counter-cultural website Zerohedge recently. In it, the authors noted a statistically significant rise in equities before the FOMC interest rate decision announcement that’s been occurring since 1994, precisely when the Fed began announcing their après meeting rate decisions. They dubbed this phenomenon pre-FOMC drift.  Their analysis led to two observations:
 

1. Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC announcements.

2. This return is earned ahead of the announcement, so it is not related to the immediate realization of monetary poNonelicy actions.”
 

The article gives statistical proof that the pre-FOMC drift is a real phenomenon. Being the eternal skeptic, I wanted to see if this was, indeed, the case.
 

The findings of the original article
In the original article, a regression analysis was performed on the S&P 500 index to determine the pre-FOMC drift while accounting for dividends and excess return over the risk free rate. It was found that the FOMC’s rate decision day’s close (Day 0) minus the close of the previous day (Day -1) was 33 basis points above the typically observed 1 basis point advance. That’s huge!
 

Not only that, but if one looks at data collected at 2pm ET on the day before to 2pm ET on the date of the rate decision (Fed rate decisions were scheduled for 2:15pm ET until very recently), a 49 basis point gain was realized. That’s even more impressive.

My test set-up
The original article showed statistically significant data going back to 1994. In the interest of (my) time, I decided to limit the analysis to the past 5 years of regularly scheduled FOMC meetings (of which there are eight per year) beginning in 2007 and extending through the present for a total of 44 dates.¹

I’ll be taking the simple approach meaning that I’ll not be doing a regression analysis nor will I consider dividends or transaction fees. Basically, what I want to show is how a trader could (or could not) have profited from directly buying an S&P 500 vehicle (the SPY or SPX futures) in the one to three day time frame surrounding the FOMC meetings.